Business Finance

• When faced with financial difficulties, we look for people or institutions that will give us the money we need. These are sources of funds
• Finance can be defined as the science and art of managing money (Gitman & Zutter, 2012)
• If you have excess money from your allowance, it presents an opportunity for investments. Investments come in many forms that will generate income or appreciate in the future
• Corporations may either be privately owned or publicly owned. Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless consent by the family members is secured. Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the Philippine Stock Exchange
• Budgeting is the act of estimating revenue (in the form of allowance) and expenses over a period of time (in this case, on a daily basis)
• Finance

  Concerned with decisions about how much of earnings is spent, how much is saved or needed, how savings are invested, and how additional funds are raised if needed (Gitman)
• If you are planning to have a business, there are forms of business organizations: Sole Proprietorship, Partnership, Corporation
• Between hiding your cash under the bed and depositing it in the bank, it would be better to keep your money in bank deposits because these earn interest
• Profitability alone does not define the success of a company
• Factors driving stock prices of listed corporations

  • Earnings of the companies
  • Prospects of the industry
  • General market sentiment
  • Economic prospects of the country
• Factors influencing market price

  • Controllable by Management
  • Uncontrollable External Factors
• Uncontrollable external factors influencing market price

  • Macroeconomic conditions
  • Political stability
  • Industry prospects
  • Market sentiment
  • Foreign funds flow
• Privately owned corporations

  • Owned by family members, stocks may not be offered to outsiders without family consent
• Comparison of Income Statements and Cash Flow Statements

  • Company A: Profitable but negative cash flow due to uncollected accounts receivable
  • Company B: Negative profits and cash flow
  • Company C: Profitable with positive cash flow
• Measurement of shareholder's wealth

  Based on the current market price of the corporation's stocks
• Holding a large amount of cash may signal unhealthy company practices
• A company can have profits but still not have enough cash to pay its obligations
• Publicly listed companies

  • Owned by unrelated investors, traded in organized exchanges like the Philippine Stock Exchange, controlled by a group of investors or a family
• Profit is determined based on the accrual method
• Objective of the biggest shareholder in a corporation is to become profitable and have a lot of cash
• If a company cannot pay its obligations

  Consequences
• Shareholder's wealth maximization should be the overall objective
• Influence of profitability on market price

  Profit is a measure of financial performance, but cash flow is also crucial
• Controllable factors influencing market price

  • Profitability
  • Liquidity and leverage position
  • Dividends
  • Competent management
  • Corporate plans
• Market price changes across different periods affecting the value of investments
• Liquidity and leverage


  • Refer to the company’s management of the type and amount of assets and liabilities it holds in its operations
• Company B has a positive cash flow but is unprofitable due to delays in payment of costs
• Company B will face liquidity problems without adequate cash inflows to meet its obligations
• External Factors influencing investment decisions


  • Factors that influence the general reaction of investors in making an investment decision
  • Factors affect all companies or a group of companies under similar circumstances
  • Result of the environment a company operates in rather than decisions of the company’s management
• Company A is profitable but generated negative cash flows due to uncollected accounts receivable of PHP100,000
• Competent management

  • Attributes may include visionary, decisive, people-oriented, inspiring, innovative, respected, and experienced/seasoned manager
• Managers are responsible for making decisions that lead towards shareholders’ wealth maximization
• Company C is profitable and has a positive cash flow, making it the best option
• Company B will soon have to pay the remaining PHP100,000 liability and its cash will no longer be sufficient
• Corporate plans that improve business prospects

  • Companies with plans for future growth and improvement are generally more attractive to investors
• Financial management aims to maximize the value of shareholders’ wealth
• Dividends


  • Holders of shares receive dividends from a corporation as returns on their investments in the form of cash or other properties
• Company A will face liquidity problems without adequate cash inflows to meet its obligations
• President (Chief Executive Officer)


  • Responsibilities include overseeing company operations, ensuring approved strategies are implemented, performing all areas of management, and representing the company in professional, social, and civic activities
• The study of finance is important